Transcript The Costs of Production

Special Delivery
Simulation
*Note to teachers*
This simulation is nearly identical to the push-up machine
activity. Instead of doing push-ups, students run across the
room placing balls into boxes.
Special Delivery Inc.
• I am the owner of a delivery service
• Your goal is to use economic reasoning
to determine how many workers my
firm should hire.
• In the process we will learn how to draw
the graph for a FIRM hiring in a
PERFECTLY COMPATIVE LABOR
MARKET.
• Get your neighbor excited!!!!
Supply for Labor
• You are supplying labor and I am
demanding it.
• I am willing to hire as many workers as
I need at a wage that is set by the
market.
• I am willing to pay between $5 and $25.
• Write down how much you are willing
to work for on your paper.
• I will hire the workers that are willing
to work for the lowest wage.
Supply of Labor
The wage set by the market is $5!
Key Questions:
1. Why didn’t anyone try to supply their labor for
$25?
• You wouldn’t get hired since there are so many other
workers that would be willing to work for less
2. Why can’t the firm get you to supply your labor for
$1?
• Since there are so many firms hiring, it is impossible for
one firm to force workers to work for below market
wage
3. If each workers must supply their labor at a wage
set by the market, what does the supply curve for
the firm look like?
• The Supply curve is PERFECTLY ELASTIC
• Supply for labor equals the Marginal Resource Cost.
MARGINAL RESOURCE COST (MRC)
•The additional cost for each additional INPUT
(worker).
•Sometimes called MFC-Marginal FACTOR Cost
Why is MRC the same as Supply?
•If a worker wants to work, they must offer their
services at the wage set by the market.
•MRC is constant because the firm can hire as
many workers as it wants at wage set by market.
Another way to calculate MRC is:
Change in
Marginal
Total Cost
Resource =
Change in
Cost
Inputs
Demand for Labor
• The firm’s demand for workers depends on
how profitable each worker is
• How can we determine how much each
worker is worth to the firm?
• If a worker generates 5 additional output
that can be sold for $10 each, how much is he
worth to the firm?
•Since the worker generates $50, the firm
profits from if they can pay him a wage less
than $50.
•Demand for each worker equals the
Marginal Revenue Product.
MARGINAL REVENUE PRODUCT (MRP)
•The additional revenue generated by an
additional resources (worker).
•In perfectly competitive product markets the
MRP equals the marginal product of the resource
times the price of the product. (MP x P)
Ex: If the Marginal Product of the 3rd worker is 5 units
and the price of the good is constant at $20 the MRP is..
$100
Another way to calculate MRP is:
Marginal
Revenue
Product
=
Change in
Total Revenue
Change in
Inputs
Let’s show you what this looks
like with a real life
simulation…
(Simulation Worksheet)
Special Delivery Simulation
Overview
• There will be several rounds in which workers will deliver
paper balls from one side of the room to the other side
• Each round lasts exactly 1 minute
• I am going to hire one more worker at the start of each
round. Workers must work together.
Resources
• 2 boxes and plenty of wadded paper or balls
Rules
• Workers must transport the balls from the “home” box to
the “delivery” box.
• Workers cannot throw the balls in the box. They must be
placed inside the box.
• Workers MUST work as a team. They cannot work
independently.
– The first worker must hand off the ball to the second worker. They
hand it to the third worker, and so forth, until the ball goes in the
delivery box
Everyone must keep track of the results on the
following chart
Special Delivery Simulation
Number of
Workers
(inputs)
0
1
2
3
4
5
6
7
Total
Product
(output)
Marginal
Product
Marginal
Revenue
Product (MRP)
Marginal
Resource
Cost (MRC)
Special Delivery Debrief
Supply
• Supply and demand in the INDUSTRY
GRAPH has resulted in a equilibrium wage
of $5.
• How much MUST each worker work for?
• Why not ask for more? Why not less?
Demand
• Each push up generative $1 worth of energy
• Calculate MP and MRP
• How much is each worker worth?
Special Delivery Debrief
Why is the MRP the demand for Labor?
• The firm is willing and able to pay each
worker up to the amount they generate.
• Each worker is worth the amount of money
they generate for the firm.
Why does the MRP eventually fall?
• Diminishing Marginal Returns.
• Fixed resources means each worker will
eventually add less than the previous
workers.
How many workers should I hire?
Continue to hire until…
MRP = MRC
Side-by-side graph showing Market and Firm
Draw and label both at wage set at $5
Wage Rate (dollars)
S
S = MRC
($5)
$5
$5
D’ = mrp’
D
d = mrp
(1000)
(5)
Quantity of Labor
Quantity of Labor
Labor Market
Individual Firm
Practice
Activity-You’re the Boss
• You and your partner own a business.
• Assume the you are selling the goods in a
PERFECTLY COMPEATIVE PRODUCT
MARKET so the price is constant at $10.
• Assume that you are hiring workers in a
PERFECTLY COMPEATIVE LABOR
MARKET so the wage is constant at $15.
• Also assume the wage is the ONLY cost.
To maximize profit how many
workers should you hire?
Use the following data:
Units of
Labor
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $15
*Hint* How much is each
worker worth?
Use the following data:
Units of
Labor
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $15
1. What is happening to
Total Product?
2. Why does this occur?
3. Where are the three
stages?
Use the following data:
Units of
Labor
Total
Product
(Output)
Marginal
Product
(MP)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
7
10
7
3
2
1
-3
Price = $10 Wage = $15
This shows the
PRODUCTIVITY of
each worker.
Why does
productivity
decrease?
Use the following data:
Units of
Labor
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $15
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
Price constant
because we are
in a perfectly
competitive
market
Use the following data:
Units of
Labor
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $15
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
Additional
Revenue
per worker
0
70
100
70
30
20
10
-30
Shows
how
much
each
worker
is worth
Use the following data:
Units of
Labor
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $15
Additional Additional
Marginal
Product Revenue Cost for each
Product
Price
per worker
worker
(MP)
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
0
70
100
70
30
20
10
-30
How many should we hire?
0
15
15
15
15
15
15
15
Use the following data:
Units of
Labor
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $15
Additional Additional
Marginal
Product Revenue Cost for each
Product
Price
per worker
worker
(MP)
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
0
70
100
70
30
20
10
-30
0
15
15
15
15
15
15
15
5 Workers MAXIMIZES Profit!!!!!
0
$55
$140
$195
$210
$215
$210
$165